2017-04-09

A path to riches and rags - crypto trading and investing

Cryptocurrencies are a fascinating development in technology. At the same time being an ingenious application of cryptography, the software designed to run it, and the currency that flows through the system. It is perhaps this tantalising mix of emerging technology and money that drives a lot of people that discover cryptocurrencies to greed at some point in their experience.

A lot of people got rich with this technology already, whether through investing, innovating, gambling or dumb luck. Those people are often visible and praised, but let's not forget about the survivorship bias - there are probably just as many if not more people that have lost a lot of money trading cryptocurrencies.

The gold rush


A number of people I've talked to seem to be going through something akin to a "gold rush" at some point of their crypto career. This usually happens early on - you discover this new technology, figure out it's a form of money, then look at the past gains and tell yourself "wow, this can make me rich!". You immerse yourself in the crypto world, take in the torrent of information, then try going into mining, trading, or something similar. In my case - it was discovering the GPU mining during the first few days of the first Bitcoin bubble (where the price went to a whopping ~$30 in the end).

In most cases, the rush is rather unsustainable as a hobby - mining is a specialised industry, short-term trading is a gamble, and services developed by inexperienced developers can be a liability. You are more likely to get burned than to make an actual profit.

From here, you can generally see a few transition options - deciding to cut one's losses and leave crypto altogether, "buy and hold" approach, or going professional.

Crypto as an investment


It is possible to treat cryptocurrencies as an investment - a high-risk investment. If you're lucky, you can get high returns. If you're not - you will end up with nothing.

A long while ago I came across an idea that "buying bitcoin is like investing in the entire bitcoin economy". Given Bitcoin's finite supply, the only way for the Bitcoin economy to grow to accommodate larger trades is through increase in velocity (how fast the coins circulate) and through the increase in value. Assuming you expect the Bitcoin economy to grow, you can expect the value of Bitcoin to grow as well. Same goes for other cryptocurrencies adhering to similar principles.

That being said, it is very important to remember that an investment in a cryptocurrency is not the same as an investment in a company that makes that cryptocurrency. XRP is not the same as Ripple Labs, factoids are not the same as Factom, etc. By investing in a company, you enter into a legally binding agreement. By buying the tokens, you're just holding the tokens. The company may do well developing projects unrelated to the token it initially created, which will increase the share price, but not necessarily the token price. Same is true the other way around - someone else may step in and make the token valuable, or possibly manipulate the price (for example, the hairy MAIDSafe presale on Mastercoin). The distinction is important to make.

While there are a lot of investment vehicles available for people in the developed countries, cryptocurrencies might be a more inclusive way to invest for the less fortunate people, or those wishing to hedge away from their government's monetary policy altogether. While this sort of way of investing can certainly yield great benefits, it can also be a fertile ground for scammers.

As usual, the age-old advise applies - don't invest more than you can afford to lose, hold, don't try to day trade, keep your coins safe.

I'd also add an advise to buy coins with long-term growth potential - coins developed by competent people, being a dominant player in their own crypto niche, etc. Those have a higher chance of sticking around than the flash-in-the-pan copycoins.

Crypto trading


An alternative to buying coins and holding them is to do trading. Bitcoin, the biggest crypto out there is certainly a volatile currency. Altcoins are just a wild ridepumpers exist to exploit people, whales can sway the marketthe honey badger don't care, etc. If you can make sense of this madness, there is certainly a lot of money to be made here.

However, the same riches can be lost as easily as they can be gained. A few interesting words of wisdom:



Generally, trading cryptos is about speculating on which system will deploy the next big feature, get the next big headline, or score the next big partner. The only problem here is that the markets are so thin in comparison to the wallets of the big players, that they can be easily swayed in a direction that is not rational - this is why short-term trading is very risky.


If you don't know what you're doing, don't try to be too smart


In my crypto career I've had ample opportunity to make mistakes and learn from them. In the end, I came out ahead by sticking to what I know and not trying to be too smart for my own good. Here are some lessons I've learned along the way:

You can't really predict the market - don't try to trade if you're not a trader.

Never go full fiat. I once sold all of my coins when the market slowly crawled to about $25/BTC in early 2013. I had to buy them back at $35/BTC when the signs were clear the market wasn't going back down.

Don't diversify your portfolio into stupid things, don't invest in any company that can't realistically outperform Bitcoin. Back in the day I liked the idea of being able to buy stocks in Bitcoin companies with bitcoin itself. In the end, I'm a few coins poorer, have some mostly worthless "stocks" held by a company in Panama.

Don't keep your coins at a rickety company. While I was lucky / smart enough to survive a number of Bitcoin exchanges going under without losing any coins (I've used Bitomat, MtGox, BitCurex, Cryptsy, etc.). The two times my coins were lost were due to Ripple - some at WeExchange (a gateway that also had some crypto stocks AFAIR), and others due to the Ripple's official wallet being a brainwallet by default.

Don't lend crypto. Back in the day, I tried BTCJam. Lost all of the coins I put in, and it didn't look like the company had any plans of trying to enforce the collections. Other users have similar experience of high default rates. I've been staying clear of such websites ever since.

Be patient, make informed, long-term decisions. In the end, this approach has been the most successful for me. I haven't sold a single coin in a long time and I have a decent diversity of cryptos I expect to do well for themselves in the long run.

Conclusions


Cryptocurrencies are a high risk investment. They can yield great returns, but also end up losing you all that you've invested in them overnight.

2017-04-02

Do you need a blockchain? A simple overview.

Recently, I had a conversation with an entrepreneur that wanted to integrate blockchain into his business. After a lengthy conversation, we reached a conclusion that his project wouldn't really benefit from the technology at the current stage. While some blockchain enthusiasts might argue that most ventures would be better with a blockchain integration, figuring out when the technology isn't right for a project is just as important as increasing its adoption when it is.

In light of that event, I put together some simple guidelines of when you should consider using a blockchain technology or cryptocurrencies in general, what benefits they can give you and what are some downsides. If none of those criteria fit, it might be best to reconsider chasing the blockchain fad for the time being.

1) You can't use the traditional banking system


If you are operating a business that has problems with the traditional banking system, you can use the cryptocurrencies to accept payments. Perhaps PayPal is not supporting your country, charging high fees, or the nature of your business makes you undesirable for banks. Maybe your local currency is under strong foreign exchange control or experiencing hyperinflation. In all of those examples, using cryptocurrencies such as Bitcoin as an alternative means of payment is an option.

You might have problems getting your customers to pay you in those currencies, but this might be better than nothing.

2) You are sending money internationally


International bank wires can take a lot of time and be expensive. It is possible to circumvent some of that through the use of cryptocurrencies. There are some companies that support last-mile payments, such as Coins.ph in the Philippines, or Abra wanting to create "the Uber for money transfers". You could, conceivably, send a local wire transfer to your local Bitcoin exchange, convert it to BTC, then use those coins to complete the international payment.

Solutions like these are still in their infancy however - you would have to make sure the right companies exist on both sides of your transaction and that the fees are reasonable.

3) Your business is forming close payment loops


If the money in your business is always flowing in one direction, say, from your customer's credit cards, through your bank account, down to your employees and suppliers, there isn't much room for the blockchain. The process of on boarding and off boarding would detract from your business. However, when your business starts forming closed loops of payments, you can start applying the blockchain.

Say, you're moving money back and forth between two countries. You can keep track of the payments on a system like Ripple or Ethereum and only settle the difference at the end of the day, rather than having to perform a wire transfer each time money moves back and forth.

While in this scenario you could accomplish a similar goal with a simple database, the more complex your system gets and the more actors get involved, the better you are fit for a blockchain solution.

4) You have a good infrastructure you can open to other parties


Let's say you are really good at handling the last mile payments in your country. Whether it's a country that's hard to reach financially like China, or perhaps less focused on like the Philippines (going once more with our Coins.ph example). You can do good business there by yourself, but if you open your infrastructure for other people to use, you can be earning an extra income from them. In this scenario, the blockchain essentially acts as middleware between your system and anyone that wants to use your connections. Coupled with a network effects of an open system like that, even a few vendors can form a very appealing web that spans the globe.

You don't need to be handling payments to be in the infrastructure business. Market making, FX trading, international settlement and the like are also very much in demand.

Unfortunately, systems like these aren't very common at this time. You might be building an infrastructure for the future, but at the present you might only get nominal activity at first.

5) You are creating a decentralised system


If you are building a decentralised system, a blockchain may be useful for it. If it's well implemented, it can be a convenient, reliable way to synchronise data across many nodes. You can also create a cryptocurrency token to go along with the system to manage the scarce resources you would be dealing with, whether it's storage, bandwidth, or something else. Decentralised storage, DNS, perhaps a new social network or the like could all benefit from using a blockchain technology.

That being said, a lot of decentralised systems might not benefit from this system. If you're dealing with the real world or trying to use the blockchain just as a settlement layer, you might not benefit from adding a specialised blockchain layer. Similarly, a blockchain won't make a bad project good - making a "Facebook killer" will take a lot more than that.

6) You need extra transparency


You are operating a business that can benefit from radical transparency and accountability. Perhaps you want to show your data hasn't been changed after it was created, or that you have all of your financial records accounted for. That's definitely where blockchain projects like Factom can help you (full disclosure - I work at Factom). One of the core features of the blockchain technology is that the past data cannot be altered without invalidating any future records. And if the records are public, any alteration becomes evident.

The main caveat for this approach is that blockchain-based proof of existence hasn't yet been tested in court, which means the first use of it as evidence would have to jump through some additional hurdles.

7) You want to innovate with the smart contracts


Smart contracts are an innovation in the blockchain space. They allow for the creation of autonomous programs that have access to their own money. This means you can run self-contained casinos, create decentralised autonomous organisations, etc. All very interesting and cutting-edge stuff that you can probably earn a pretty penny by building for and consulting to other companies that want to get into the blockchain space with their idea.

Unfortunately, the space is currently very niche and a lot of the noteworthy projects are very much their own thing. If you know you want to be developing smart contracts and have an idea of what you want to build, you don't need this guide really.

8) You want to build for the cryptocurrency community


The cryptocurrency community is as vibrant as any community built around an emerging technology. There is some good money to be made catering to that, whether by tapping into new markets, building exchanges, wallets, payment processors, all sorts of stuff. There is money to be made in this space if you have the right product to offer.

On the flip side, if you don't understand the market, you might not be able to earn enough money to get by. There have been countless companies that went under or never launched in the short history of the blockchain technology.

9) You want to create a new economy


We are getting into the more contentious use of the blockchain technology - creating new currencies, or "altcoins". Perhaps you are part of a community that wants to start its own currency - maybe based on time, nationality, implementing universal basic income or the like. If you want the currency to be independent, freely traded in your community, you can use the blockchain technology for that. Many have tried that before.

On the flip side, if you want to use this as some means of getting rich or the people you are working with don't have a strong need for their own currency, you might be creating another pump and dump coin that will come and go. We don't need more of those.

10) You want to raise money for your project with a crowdsale


Another contentious topic in the blockchain community - ITOs - Initial Token Offerings. If you have a project that needs some funding to succeed and you can make a good case of how you can integrate it with a blockchain, you can try doing a token presale to get some money instead of looking for actual investors. There have been some good projects that used this model, like Ethereum, but there also have been a lot of bad projects that have gone down this route.

Often, adding a token to a project doesn't make sense or makes the final product worse. ITOs have a bad rep in the community for a reason. Unless you really know what you're doing or are just in it for the money, then you can use the blockchain technology for this goal.

Conclusions


These are roughly the main reasons why you'd want to consider using the blockchain technology in your business or project. If any of these resonate with what you're doing, you might find something to make your project better or at least more interesting. If not, your effort is probably best spent elsewhere.